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Andrew Tobias

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Andrew Tobias
Andrew Tobias

Money and Other Subjects

Then Why Not Give Greenspan the Vestal Virgins?

March 19, 2002February 21, 2017

72 VESTAL VIRGINS

Trudy Karlson: ‘Did you read in the NY Times (Saturday March 2) that new translations of the Koran suggest ‘vestal virgins’ has been mistranslated? Apparently, in Arabic it just requires an additional diacritical mark, and the original scribes were writing about 72 ‘white raisins.”

☞ Oh! That’s different. Never mind. No one’s going to kill himself to have his way with a few dozen raisins. Let’s get the word out.

PUMPING THE MONEY SUPPLY

Joe Devney: ‘For several weeks after the September 11 attacks, I kept hearing that Alan Greenspan had helped the stock markets recover by ‘pumping liquidity into the system.’ Nobody ever said what that meant. The friends I asked weren’t sure, but suggested that it might refer to the series of interest rate cuts over the last year. So how does one ‘pump liquidity into the system?”

☞ Well, ‘one’ doesn’t – but the Fed can. It goes into the market and buys Treasury securities, paying for them with money it creates out of thin air. This increases the money supply, and when the supply of something increases, its price tends to fall. (If diamonds were as plentiful as blueberries, they would cost just a penny apiece.) The ‘price’ of money is the interest rate you pay to borrow it. The more plentiful the supply, the cheaper it will be to borrow, and the lower interest rates will be – at least short-term interest rates.

(Long-term rates are a tougher nut for the Fed to affect, because the market is not stupid. The market knows that, however plentiful money may be today, it could become scarce tomorrow. And it knows that easy money could ignite inflation. No one wants to hold a long-term bond at a low interest rate if inflation is around the corner. So the Fed’s power to cut interest rates mainly applies to short-term interest rates – even though, in many respects, long-term rates are a lot more important.)

Chances are, the Fed is done pumping liquidity and cutting interest rates. A good thing, too, as we had gotten fairly close to zero . . . like a plane coming in heavy and fast and managing to stop just a few dozen yards short of the end of the runway. Good job, Dr. Greenspan.

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